Inflation Hasn’t Escaped the Energy Cage
You already know the bad news on inflation: the May Consumer Price Index rose 4.2 percent from a year ago. That’s the worst CPI print in three years.
The good news is that inflation cooled in May, and inflationary pressures are not spreading from the energy sector to the rest of the economy.
Let’s begin with what is actually driving the headline. Energy prices surged 23.5 percent over the past year and contributed 1.76 percentage points to the 4.2 percent all-items reading — 42 percent of the entire annual increase coming from a single geopolitical supply disruption. Gasoline alone is up 40.5 percent over the year. Strip energy out and the all-items index rises just 2.4 percent. That is not an alarming number. That is a number the Federal Reserve could comfortably live with.
The monthly data tell an even more encouraging story. The all-items index rose 0.5 percent in May on a seasonally adjusted basis, down from 0.6 percent in April. Core inflation — all items less food and energy — rose just 0.2 percent, matching its softest monthly reading in recent months and annualizing to 2.4 percent. In other words, inflation is decelerating, not accelerating.
The goods picture is particularly striking. Core goods fell 0.1 percent in May on a seasonally adjusted basis. Durable goods are essentially flat year-over-year. New vehicles are up just 0.2 percent over the year. Used cars are down 2.0 percent. Household furnishings posted their weakest monthly reading since August 2009. Electronics and tech hardware are down more than 12 percent. There’s no sign that higher energy prices are leaking into the prices of goods.
Insurance and Drug Prices Are Falling
Outside of energy, the deflationary forces running through the economy are broad and substantial. Motor vehicle insurance — one of the largest single-category weights in the index at 2.7 percent of the basket — fell 1.7 percent in May, its sharpest monthly decline since October 2020, reversing a multi-year spike that had been a persistent contributor to services inflation. Prescription drugs are down 2.0 percent over the year. Over-the-counter medications are down 2.5 percent. Health insurance is down 6.4 percent. Twenty-nine categories with meaningful basket weight are falling year-over-year.
Note to our friends in Washington, DC: Republicans should be running wall-to-wall ads going into the midterms touting falling drug prices and insurance prices. Do it for autos also. Cars are less expensive and auto-insurance prices are falling. These are major wins for the American family.
The services stickiness that remains is concentrated almost entirely in shelter, which accounts for 35 percent of the entire CPI basket. But shelter is a lagged measure of market rents that peaked years ago and is grinding steadily lower — owners’ equivalent rent ran at 0.3 percent in May, down from 0.5 percent earlier this year. The other major services outlier is airline fares, up 26.7 percent over the year, which is substantially a jet fuel cost story.
The supercore measure — all items less food, shelter, and energy — rose just 0.1 percent in May. Annualized, that is 1.2 percent.
The Federal Reserve Bank of Cleveland’s inflation measures, which are designed specifically to filter out extreme price movements like oil shocks, confirm the picture. The Cleveland Fed’s median CPI ran at 2.85 percent over the past year in May and the trimmed mean ran at 2.91 percent — both running near the Fed’s two percent target when adjusted for the typical gap between CPI and PCE measures, and both decelerating on a monthly basis from an April spike driven by energy pass-through.
Don’t get us wrong. The oil shock is not a trivial event. But the data describe an economy where underlying inflation is contained, and goods prices are broadly falling.
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